A seedy area, then along came Twitter

A high-tech influx has accomplished the cleanup of a section of San Francisco that had languished for years

By KRISTINA SHEVORY, The New York Times

Studded with check-cashing joints, strip clubs and dollar stores, a seven-block strip on Market Street here has resisted cleanup efforts for years -- despite being just blocks from City Hall.

Not surprisingly, the area has suffered some of the city's highest vacancy rates for office or retail space.

But then came Twitter, which in June 2012 established its headquarters in an 11-story building here that had been vacant for five years.

At the time, the Art Deco building had some of the most spacious floor plans in the city amid a tightening rental market.

Twitter signed a lease until 2021 for 295,000 square feet.

Emboldened by Twitter's move and a city tax incentive that largely exempts companies from city payroll taxes if they move to the area, 15 other companies -- including Spotify and Yammer -- have committed to take 1.3 million square feet, and construction of apartment towers with 5,500 units are in the works.

"You had a once vacant and blighted area that is now a gravitational center for some of the most innovative companies in the world," said Todd Rufo, director of the San Francisco Office of Economic and Workforce Development.

Not to be outdone, technology companies like Google, Amazon, Microsoft and Yahoo are expanding or moving to the city and now comprise more than half of the demand for office space.

"San Francisco has led the U.S. commercial real estate market out of the financial crisis," said Rob Speyer, co-chief executive officer of Tishman Speyer, a New York-based real estate developer that has begun a pair of speculative office buildings, among the first since the recession here.

"There were literally no construction starts, vacancy was dropping into the low single digits and rents were increasing 30 percent a year," Speyer added. "It was obvious to us the market could support not just one but several buildings."

The surge in San Francisco also illustrates how nearby Silicon Valley no longer has an exclusive grip on technology companies. About 18 months ago, tech companies started moving or expanding here to be closer to their employees.

Venture capitalists, traditionally sequestered in the valley to be close to start-ups and entrepreneurs, have followed.

The city's tax incentive gives companies a break on payroll taxes for six years on employees hired after their moves. Before the city approved the incentive, estimates showed that Twitter would save about $22 million over six years.

The city also now offers all companies a tax break on stock options when they are exercised, and with Twitter poised to complete an initial public offering, some analysts contend San Francisco could lose millions of dollars if Twitter employees cash-in there options.

"The mayor and board of supervisors realized the existing tax structure taxed job creation, so they did this to keep start-ups like ours in the city," said Karen Wickre, a spokeswoman for Twitter.

Whether because of the momentum or the tax break, the area has become a magnet for others, as well.

Audio company Dolby Laboratories agreed last year to purchase a 16-story, 354,000-square-foot government building a block away from Twitter's new offices for $110 million.

With 700 employees scattered in three aging, rented buildings throughout San Francisco, Dolby needed a central building and did not want to leave the city where it was founded. At the time, very few buildings were large enough or could be renovated for laboratories.

"You really have to be looking forward if you're buying this building in this neighborhood. We're buying for the future," said Lewis Chew, Dolby's CFO.

Across the street from Twitter, a Miami developer is erecting a 754-unit apartment complex. Another 37-story tower will open next year.

After Twitter announced its plans, the developer began altering designs to include amenities such as a saltwater pool, valet parking and dog-walking.

"We wanted to participate even more in the renaissance of the area," said Bruce Menin, a principal with development firm Crescent Heights.

"We wanted to set an example and provide the most creative offerings."